VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

Valeant: Improved offer for Allergan will not be all in cash - 8:43 AM

•Valeant (VRX) says that any improved bid for Allergan (AGN) "will not be an all cash deal."

•Valeant intends to sweeten its $45.7B cash-and-stock offer based on feedback that the Canadian company hopes to receive during a meeting with stockholders from both companies on May 28.

•At the meeting, Valeant also plans to respond to Allergan assertions that Valeant's model is not sustainable, that Bausch & Lomb is not growing, that the company slashes R&D and is not committed to innovation, and that it will be impossible to generate $2.7B of synergies without affecting sales growth. (PR)

 

 

Gio

 

[gary17]

Gio - or somebody - can you please help me understand how you are valuing this?

 

at the surface this is  many x book value.....  many x revenue....  are you using cash flow? ebitda?  sorry about being ignorant and lazy to look up the thesis...

 

thank you

Gary

PS.  do i see it correctly 2013 EPS is negative?

even if we ignore that and just look at cash generated at 1B... that's still a 40x stock... 

[giofranchi]

Gio - or somebody - can you please help me understand how you are valuing this?

 

at the surface this is  many x book value.....  many x revenue....  are you using cash flow? ebitda?  sorry about being ignorant and lazy to look up the thesis...

 

thank you

Gary

PS.  do i see it correctly 2013 EPS is negative?

even if we ignore that and just look at cash generated at 1B... that's still a 40x stock...

 

Hi Gary,

I look at revenues growth and Cash EPS growth. As long as revenues and Cash EPS grow handsomely, I am willing to adding whenever the price is around 13xCashEPS.

Cash EPS, according to Mr. Pearson & Co., is what the business would truly earn in a steady state regimen, meaning if it would stop making acquisitions.

 

Of course, the bears think Cash EPS overstate the true earning power of VRX… To that I can only say I find Mr. Pearson's thesis much more convincing than theirs!

 

Listen, in the end imo it is very easy. It all comes down to this: either you have trust and respect for Mr. Pearson, or you don’t. I would suggest to read all the conference call transcripts of the last few years: having done so, I have come to like, trust, and admire Mr. Pearson very much.

 

On the other hand, if you think Cash EPS are misleading, like the bears seem to think, you cannot trust Mr. Pearson. And, if you don’t trust him, valuation is the very last reason why you shouldn’t invest in VRX! ;)

 

Gio

 

[Fat Pitch]

On the other hand, if you think Cash EPS are misleading, like the bears seem to think, you cannot trust Mr. Pearson. And, if you don’t trust him, valuation is the very last reason why you shouldn’t invest in VRX! ;)

 

Gio

 

I like the business model of this company and the capital allocator at the helm, but I’m having a difficult time buying into the cash earnings they tell investors to focus on.

 

I get acquisition related charges are one-time events, but adding back in amortization of intangibles when it is related to patent drugs running off their patents seems way too aggressive… reminds me of EBITDA metrics.

 

The real earnings of this company is probably overstated by ~15% when you account for these adjustments. This isn’t even factoring in the longevity of the goodwill, yeah I get this is an accounting term, but this is backed by debt so you need to pay attention to it.

 

If they nab Allergan then we are off to the races again.

 

[equitynyc]

Chanos' short thesis was a joke and was already debunked by Ackman's presentation, but people are going to follow him anyway, because he's famous and stuff...Does anybody actually know his track record?

 

He's not doing too well right now:

 

Jim Chanos thanked his investors for their 'continued support and forbearance' in his recent letter.

http://j.mp/1okgxKG

[bmichaud]

That was not me who said that...it was "wbr".

[mvalue]

Chanos' short thesis was a joke and was already debunked by Ackman's presentation, but people are going to follow him anyway, because he's famous and stuff...Does anybody actually know his track record?

 

He's not doing too well right now:

 

Jim Chanos thanked his investors for their 'continued support and forbearance' in his recent letter.

http://j.mp/1okgxKG

 

That is from 1993

[sleepydragon]

chanos lives in a big house :) so he must be pretty good, at least judging by history.

there was a report of the highest priced house sold in USA, and that house has neighbors Chanos and seinfeld

[giofranchi]

I get acquisition related charges are one-time events, but adding back in amortization of intangibles when it is related to patent drugs running off their patents seems way too aggressive… reminds me of EBITDA metrics.

 

Ok, so let’s see if an example might be useful to clear this misunderstanding about goodwill:

 

So, let’s take ABT, for instance: its price share is $39.56, while its BVPS is $15.57. ABT is selling for $39.56 / $15.57 = 2.54 x BVPS.

 

Therefore, if I were to purchase the whole ABT today, I would have to record a goodwill of Market Cap – Total Equity = $Mil 59,417 - $Mil 23,390 = $Mil 36,027. Goodwill that is to be amortized from year 1 for many years into the future.

 

Now, I have paid $Mil 59,417 right away, have I not? So, in which cases are those amortization charges true costs? These two cases, and these two only:

1) $Mil 59,417 is higher that the true worth of ABT (this simply means I have paid too much for ABT),

2) $Mil 59,417 was the true worth of ABT, when I bought it, but then, perhaps through mismanagement or through the erosion of ABT’s competitive position, its true worth is declining.

 

But, if we look at ABT’s history during the last 50 years, it can very briefly summarized as follows: though a lot of patents on drugs came and went, the value of ABT has always kept increasing.

 

And it is imo what will happen also to the businesses purchased by VRX: not only Mr. Pearson has not overpaid for them, but their true worth will keep increasing over time too.

If this is true, goodwill amortization charges cannot be true costs.

 

Therefore, how is the true worth of the businesses that join the VRX family going to increase over time? By "simply" following what has become popular today as the 3G strategy for profit maximization:

a) By rationalizing costs: cut non-strategic costs, increase strategic costs,

b) By performing tuck-in acquisitions (buy R&D cheaply),

c) By investing only in the kind of R&D which has a high probability of yielding profitable results,

d) By strengthening and training better and better the sales representatives.

 

Of course, if I am wrong, and the true worth of the businesses that join the VRX family decreases over time, then yes!, I might agree with you… at least some of those amortization of goodwill charges are true costs… But it won’t happen!! ;) ;)

 

Gio

ABT.pdf

[peter1234]

Gio,

 

as i understand it:

 

Goodwill is an intangible asset with an indefinite life.

 

When you make an acquisition, you book the payment over identifiable assets to Goodwill.

Some of the assets you identify as Intangibles with a finite life and assign to Intangibles (like customer relationships, patents.).

 

GW in the past was amortized over (max) 40 years. Now, you just have to check it every year. If it is impaired, you take an impairment that year. The accountants usually show you their assumptions for discount rates and growth rates and tell you the sensitivities for impairment. Oftentimes you can disregard the impairment to income for the current year. However (and this is a big however), the business has been impaired and you need to understand that. The economic value might come back (or not) but GW will not be written up again.

 

Some of these intangible assets you amortize over their assumed life. These charges might or might not be 'real' economic depreciation (customer relationships often stay, patents will expire but as long as there is no generic, they preserve some of their value). So you can oftentimes add back (part of) amortization.

 

Accounting, accounting... , I hope someone will correct me if I am off...

 

:) ;) ;D

[giofranchi]

patents will expire

 

Patents that expire will simply be replaced by new patents… the value of the business as a whole will go up… as it happened many times for ABT (my example) during the last 50 years… If I pay 2.5 x BV for the whole ABT today, but its true worth is 3 x BV, and its value keeps increasing for many years ahead, though I must amortize the difference between what I paid for ABT and its BV, and put those amortization charges on my income statement… they are not true costs… how could they be?! ;)

 

Gio

 

[peter1234]

Great example of value creation by outlierly good operators like Michael Pearson.

 

;)

[Fat Pitch]

patents will expire

 

Patents that expire will simply be replaced by new patents… the value of the business as a whole will go up… as it happened many times for ABT (my example) during the last 50 years… If I pay 2.5 x BV for the whole ABT today, but its true worth is 3 x BV, and its value keeps increasing for many years ahead, though I must amortize the difference between what I paid for ABT and its BV, and put those amortization charges on my income statement… they are not true costs… how could they be?! ;)

 

Gio

 

Gio,

 

There is a difference between goodwill and intangibles with finite life. The write off from patent expiration and customer relations is in excess of Valeant’s current R&D expenditure. Unless Valeant’s R&D is soo efficient that it can overcome the loss of patents and grow revenues then Pearson needs to write a book and show the whole industry this magical manna he created.

 

I like the business model, but I’m trying to get a handle on the true FCF it is producing. Seeing the answers I’m getting from my questions it is becoming more apparent there is some blind trust with Pearson.  Yes I agree value is being created, but I’m becoming more convinced this value is overstated by their classification of cash earnings, specifically adding back 100% of the amortization of intangibles where patents expire and the revenue of the products are permanently impaired as a result. Any prudent investor would consider this a real cost not to overlook.

 

 

[giofranchi]

Gio,

 

There is a difference between goodwill and intangibles with finite life. The write off from patent expiration and customer relations is in excess of Valeant’s current R&D expenditure. Unless Valeant’s R&D is soo efficient that it can overcome the loss of patents and grow revenues then Pearson needs to write a book and show the whole industry this magical manna he created.

 

I like the business model, but I’m trying to get a handle on the true FCF it is producing. Seeing the answers I’m getting from my questions it is becoming more apparent there is some blind trust with Pearson.  Yes I agree value is being created, but I’m becoming more convinced this value is overstated by their classification of cash earnings, specifically adding back 100% of the amortization of intangibles where patents expire and the revenue of the products are permanently impaired as a result. Any prudent investor would consider this a real cost not to overlook.

 

Well, of course R&D at VRX will be more effective than elsewhere… after all that’s exactly what VRX is supposed to accomplish: to cut financially unjustifiable R&D costs! But I have also listed 3 other ways Mr. Pearson & Co. might succeed in increasing the true worth of the businesses they purchase over time.

 

I look at it this way: it is not as if VRX will “invest for growth” less than its peers; it will invest the same amount, or probably even more… But it will invest DIFFERENTLY. Instead of going "all in" with R&D, Mr. Pearson will spread the funds at his disposal among a), b), c), and d)… Result: the businesses VRX buys will become more and more valuable!

 

Is this “blind trust” in Mr. Pearson?! Well, of course you must believe he has the right capabilities to correctly invest in a), b), c), and d)! But you also must understand the business model, and why investments in a), b), c), and d) might work much better over time, than simply betting everything on R&D… In other words, you must understand the business and judge the quality of management… Is there anything else about investing?

 

Gio

 

[Liberty]

Gio,

 

There is a difference between goodwill and intangibles with finite life. The write off from patent expiration and customer relations is in excess of Valeant’s current R&D expenditure. Unless Valeant’s R&D is soo efficient that it can overcome the loss of patents and grow revenues then Pearson needs to write a book and show the whole industry this magical manna he created.

 

I like the business model, but I’m trying to get a handle on the true FCF it is producing. Seeing the answers I’m getting from my questions it is becoming more apparent there is some blind trust with Pearson.  Yes I agree value is being created, but I’m becoming more convinced this value is overstated by their classification of cash earnings, specifically adding back 100% of the amortization of intangibles where patents expire and the revenue of the products are permanently impaired as a result. Any prudent investor would consider this a real cost not to overlook.

 

Well, of course R&D at VRX will be more effective than elsewhere… after all that’s exactly what VRX is supposed to accomplish: to cut financially unjustifiable R&D costs! But I have also listed 3 other ways Mr. Pearson & Co. might succeed in increasing the true worth of the businesses they purchase over time.

 

I look at it this way: it is not as if VRX will “invest for growth” less than its peers; it will invest the same amount, or probably even more… But it will invest DIFFERENTLY. Instead of going "all in" with R&D, Mr. Pearson will spread the funds at his disposal among a), b), c), and d)… Result: the businesses VRX buys will become more and more valuable!

 

Is this “blind trust” in Mr. Pearson?! Well, of course you must believe he has the right capabilities to correctly invest in a), b), c), and d)! But you also must understand the business model, and why investments in a), b), c), and d) might work much better over time, than simply betting everything on R&D… In other words, you must understand the business and judge the quality of management… Is there anything else about investing?

 

Gio

 

Exactly. VRX is also investing heavily into its sales force, which is another way to get organic growth. Management seems to think that this gives better returns per dollar invested than equivalent R&D investments for certain product lines.

[CorpRaider]

I'm circling the waters hoping for some yummy merger securities...

[original mungerville]

Gio,

 

There is a difference between goodwill and intangibles with finite life. The write off from patent expiration and customer relations is in excess of Valeant’s current R&D expenditure. Unless Valeant’s R&D is soo efficient that it can overcome the loss of patents and grow revenues then Pearson needs to write a book and show the whole industry this magical manna he created.

 

I like the business model, but I’m trying to get a handle on the true FCF it is producing. Seeing the answers I’m getting from my questions it is becoming more apparent there is some blind trust with Pearson.  Yes I agree value is being created, but I’m becoming more convinced this value is overstated by their classification of cash earnings, specifically adding back 100% of the amortization of intangibles where patents expire and the revenue of the products are permanently impaired as a result. Any prudent investor would consider this a real cost not to overlook.

 

 

 

Well, of course R&D at VRX will be more effective than elsewhere… after all that’s exactly what VRX is supposed to accomplish: to cut financially unjustifiable R&D costs! But I have also listed 3 other ways Mr. Pearson & Co. might succeed in increasing the true worth of the businesses they purchase over time.

 

I look at it this way: it is not as if VRX will “invest for growth” less than its peers; it will invest the same amount, or probably even more… But it will invest DIFFERENTLY. Instead of going "all in" with R&D, Mr. Pearson will spread the funds at his disposal among a), b), c), and d)… Result: the businesses VRX buys will become more and more valuable!

 

Is this “blind trust” in Mr. Pearson?! Well, of course you must believe he has the right capabilities to correctly invest in a), b), c), and d)! But you also must understand the business model, and why investments in a), b), c), and d) might work much better over time, than simply betting everything on R&D… In other words, you must understand the business and judge the quality of management… Is there anything else about investing?

 

Gio

 

Exactly. VRX is also investing heavily into its sales force, which is another way to get organic growth. Management seems to think that this gives better returns per dollar invested than equivalent R&D investments for certain product lines.

 

The sales force is Gio's "d" - so he has that covered. Clearly Pearson is indeed saying he basically increases the sales force and slashes R&D and mid-management - I think this makes a ton of sense, so I am in.

[gary17]

Hello... I have another question for those who own Valeant... would you consider the cost of "acquisition of business" an important part of maintaining Valeant Pharmaceutical's competitive advantage? my initial thinking is no... since if they stop acquisition today, they will simply keep selling the pharmaceuticals they have today. 

thanks - Gary

[giofranchi]

Hello... I have another question for those who own Valeant... would you consider the cost of "acquisition of business" an important part of maintaining Valeant Pharmaceutical's competitive advantage? my initial thinking is no... since if they stop acquisition today, they will simply keep selling the pharmaceuticals they have today. 

thanks - Gary

 

“acquisition of business” is not a cost… it is investment. If opportunities for successful investments suddenly cease to be available, growth will surely suffer. But this is obvious: capital invested in new profitable endeavors is the definition of growth itself! ;)

 

Gio

 

[giofranchi]

Allergan gets formal in its opposition to Valeant - 8:37 AM

•Allergan (AGN) publishes an investor presentation slamming Valeant Pharmaceuticals (VRX) on multiple fronts. It criticizes Valeant's anemic organic growth rate, underperforming acquisitions, lack of experience promoting products on Allergan's scale, instability of its management team, etc. etc.

•Valeant executives must feel like they are trying to hug a porcupine.

 

 

Gio

 

[Liberty]

Here it is: http://www.allergan.com/assets/pdf/investor-presentation-may-27-2014.pdf

[txlaw]

Well, I've thrown this sucker into the too hard pile. 

 

Still looking forward to seeing what happens, though.

[PJM]

Interesting presentation. Some very insightful details but after that it fell to some very insensible slides showing difference between adjusted cash earnings vs. GAAP earnings, quoting chanos etc.

[Spekulatius]

Interesting presentation. Some very insightful details but after that it fell to some very insensible slides showing difference between adjusted cash earnings vs. GAAP earnings, quoting chanos etc.

 

What is insensible about it?

 

I did not know that VRX relies on heavy price increases to keep revenues even. This does not look sustainable to me. I also did not know that moving the IP into offshore tax havens had a significant upfront cost, Of course VRX can book this as a one off charge, but if it indeed takes a decade to get even in terms if cash flow it seems like the tax deal is not that great.

 

 

Many other good points (regarding R&D budget versus forecast, feasibility to cut 74% of the SG&A etc ). They also brought up the Tyco rollup analogy that I mentioned before in this thread. It will be interesting to see VRX rebuttal.

[Fat Pitch]

allergan is simply posturing. the business "model" they decry has increased shareholder value by 8x in a few years. allergan have no real defense. so they are attacking vrx. but the allergan shareholders will decide; not the entrenched management and bod. I think they are just trying to raise the price, which is what they should be doing. they will kiss and make up once they close the deal and negotiate their golden parachutes.

 

You still think it is simply posturing? Management just compared Valeant to Tyco. This doesn't sound like they want a higher price. It sounds like no way in hell they are going to let Valeant rape their company and employees. 

 

They are attacking the source of currency that's being used in the offer which is the stock. We'll see if Valeant goes into the details of their business model tomorrow morning. If they gloss over anything it just gives more credence to the accusations.

 

A deal might get through, but management is going to delay as long as possible and who knows how long the favorable financing will be in place.